Oct 4, 2013 ... Jim Brumby, Lead Economist and Sector Manager. World Bank Indonesia.
Paramadina Public Policy Institute, October 4, 2013 ...
Jim Brumby, Lead Economist and Sector Manager World Bank Indonesia Paramadina Public Policy Institute, October 4, 2013
OCTOBER 2013 IEQ LAUNCH PRESENTATION More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities
The role of good policies in this time of continuing adjustment
FIRST SHOCK: TRADE SHOCK, SINCE 2011… Quarterly merchandise trade balance, USD billion 12 10 8 6 4 2 0 -2
Source: BI
…AS TERMS OF TRADE HAVE WEAKENED 600
US Dollar price index, 2000 average = 100
500 Brent crude oil 400 Indonesia’s major export commodities
300 200 100 0 -100 Jan-00
Jan-03
Source: World Bank
Jan-06
Jan-09
Jan-12
PRESSURING THE OVERALL CURRENT ACCOUNT
USD billion 15
Goods trade balance Income balance Current account balance
Services trade balance Current transfers
10 5 0 -5 -10 -15 Jun-07 Source: BI
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
SECOND SHOCK: FINANCING COSTS 8
Yield, percent Emerging market sovereign USD bonds (EMBIG) Indonesia sovereign USD bonds (EMBIG sub-index)
7 6 5 4 3 2 1 10-year US Treasury note 0 Sep-09
Apr-10
Source: JP Morgan
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
OCTOBER 2013 IEQ LAUNCH PRESENTATION More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities
The role of good policies in this time of continuing adjustment
CURRENCY: RUPIAH ADJUSTING Index, 2010 average = 100 110 105
USD/IDR Trade-weighted
Inflation-adjusted trade-weighted
100 95 90 85 80 75 70 Sep-07
Sep-08
Source: World Bank
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
MONETARY CONDITIONS: TIGHTENING Percent, year-on-year
BI Overnight deposit facility rate 10
New loan approvals (RHS)
8
200 150 100
6
50 4 2 0 Jan-06 Source: BI
0 FASBI rate -50 -100 Dec-07
Dec-09
Dec-11
DOMESTIC DEMAND: SOFTENING Growth yoy, percent 9
100
8
80
7 6
Real domestic demand
60 40
5
20
4
0
3
1 0 Jun-05
-20
Imports (US Dollar, RHS)
2
-40 -60
Oct-06
Feb-08
Source: BPS; World Bank staff calculations
Jul-09
Nov-10
Apr-12
INVESTMENT SLOWING DOWN Real fixed investment growth, percent 16
12
Building Foreign transportation Total
Foreign machinery & equip Other
8
4
0
-4 Jun-11 Source: World Bank
Dec-11
Jun-12
Dec-12
Jun-13
REPEATED DOWNWARD REVISIONS Average of analysts’ real GDP growth forecasts 6.4 2014 6.2 6.0 5.8 2013 5.6 5.4
Source: Consensus Economics
OUTLOOK: MORE ADJUSTMENT TO COME… October IEQ 2011 2012 2013p 2014p Real GDP
(% change)
Consumer price (% change) index Current account (% GDP) deficit Major trading (% change) partner GDP
Previous (July) 2013p
2014p
6.5
6.2
5.6
5.3
5.9
6.2
5.4
4.3
7.3
6.7
7.2
6.7
0.2
-2.8
-3.4
-2.6
-2.7
-2.1
3.6
3.4
3.4
3.9
3.4
4.0
Source: BI; BPS; Ministry of Finance; World Bank staff projections
…BUT PERSPECTIVE, PLEASE 8
Real GDP growth, percent Indonesia
6 4 2 Major trading partners 0 -2 -4 -6 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Source: World Bank
OCTOBER 2013 IEQ LAUNCH PRESENTATION More subdued growth outlook, resulting from two major shocks to the economy and ongoing adjustments Developments in Q3 show adjustments are well underway but highlight Indonesia’s macro vulnerabilities
The role of good policies in this time of continuing adjustment
THREE R’S FOR POLICY Responding, to facilitate more near-term adjustment: Monetary and fiscal policy coordination Exchange rate flexibility
Reducing uncertainty: Contingency planning Communication
Refocusing policies to lift sustainable growth rate: August package: follow through “Quick wins” for competitiveness Fiscal sector: energy subsidies, infrastructure spending, social protection
AUGUST PACKAGE: IMPLEMENTATION IS KEY Relieve external balance pressures • Exports: tax relief for labor-intensive exporters • Investment: DNI; “de-bottlenecking”
Reduce inflation pressures • Food imports: move to price-based restrictions
Support employment • Bounded zones • Tax relief for qualifying firms in labor-intensive sectors • Minimum wages
MORE MEASURES TO LIFT COMPETITIVENESS Boost from weaker Rupiah provides an opportunity… …but will be wasted without a supply response “Quick wins” in trade facilitation can help 10.5
Average container dwell time at Tanjung Priok, days
9.5 8.5 7.5 6.5 5.5 4.5 Jan-11
Jul-11
Jan-12
Source: Jakarta International Container Terminal (JICT)
Jul-12
Jan-13
Jul-13
COSTS AND RISKS FROM ENERGY SUBSIDIES Energy subsidy costs – baseline and with 10 percent IDR depreciation/oil price increase 400
IDR trillion
350 300 250 200 Energy subsidies (Baseline)
150
Energy subsidies (10% IDR depreciation)
100
Energy subsidies (10% Oil price increase)
50 0 2009
2010
Note: *World Bank projections Source: World Bank staff calculations
2011
2012
2013*
2014*
REDIRECTING SPENDING: THE OPPORTUNITY Spending on fuel subsidies and infrastructure, percent of GDP 7
Fuel subsidy cost Total infrastructure spending (government, SOE and private)
6 5 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014* *World Bank projections Source: Ministry of Finance; World Bank
MORE INFRASTRUCTURE STOCK, HIGHER INCOME 4,500
2011 per capita income – actual, and following higher annual infrastructure growth rate increases (USD)
4,000
648 180
3,500 3,000 2,500 2,000 1,500
3,471
1,000 500 Actual Source: World Bank staff calculations
5 percent
10 percent
BREAKING INTO INFRASTRUCTURE CYCLE ADDRESS THE PERSISTENT INFRASTRUCTURE GAP
SUPPORT EXTERNAL BALANCES OVER THE MEDIUMTERM • • •
Improve domestic and external competitiveness Potential to re-orientate import-intensity of spending Enhance FDI potential (and provide more stable financing)
REALLOCATE SPENDING TOWARDS INFRASTRUCTURE • •
Offset the rise in financing costs Enhance sustainable growth
MAIN MESSAGES Indonesia faces greater constraints: trade shock, global liquidity The economy and policy settings are adjusting: Base case outlook for growth moderation and gradually narrowing current account deficit But external uncertainties still elevated and adjustment phase carries risks
Critical continued role for policy – 3 R’s: Responding, to facilitate more near-term adjustment Reducing uncertainty: contingency planning and communication to support confidence Refocusing policy efforts on lifting competitiveness and the sustainable growth rate • August policy package implementation • Additional “quick wins”, e.g. trade facilitation • Continuing progress on fiscal sector reforms
